Steel/Scrap: Pricing Pause or Inflection Point? – UBS

UBS Steel team is out with a fairly interesting call titled: “Pricing Pause or Inflection Point?”

Slipping scrap makes buyers skittish
Global scrap prices are falling and UBS industry contacts see more weakness ahead. Even with Turkish buying and reasonable U.S. demand, they heard shred was $440/t this wk from a peak $520/t in Jan. as “prices were just too high” and buyers had rebuilt inventory. Chinese new year’s typical pause may be part of the weakness, but spot met coal also seemed eager to slip once it was clear Australia ports were spared the brunt of the recent cyclone. Scrap is often a leading steel price indicator.

“Steel prices will only be too high when you read it in the WSJ”
The CEO of a large distributor this week said steel prices were not too high, as the WSJ and other media had not reported on steel causing inflation. Today a top WSJ article addressed high steel costs. A 64% spike in benchmark US HRC since an Oct trough overshot most global prices and may invite import, as input prices ease.

Supply disruptions may delay the inevitable
While pricing cycles have contracted from ~1/yr to 2.5x/yr, the firm notes they may be early in calling a peak but still think it is imminent. Praxair oxygen supply woes can limit output at 2 mills about a wk, and some other weather-related issues can support pricing or one more hike near term. Still, they think many buyers prebought into mkt strength but are now more cautious, especially in light of retreating scrap prices.

Steel price correction near-term prompts a more cautious view
UBS see a relatively mild retreat in steel and scrap prices in coming mos ultimately providing better buying opportunities, especially for structurally favored names, such as SCHN, ATI, and STLD. They think weaker prices are worst for AKS and X.

Notablecalls: Timna Tanners, the UBS analyst making this call is actually pretty good.